A PROJECT REPORT

ON
“A COMPARATIVE STUDY OF MUTUAL FUND
PERFORMANCE”

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF

POST GRADUATE DIPLOMA IN MANAGEMENT,
GURU NANAK INSTITUTE OF MANAGEMENT, PUNJABI BAGH NEW DELHI.

Submitted By Supervised By
Mohd. Khurshed Siddiqui Mr.N.P.Singh
Roll No-5958 Assistant Professor
Semester IV (Finance)
Specialization: Finance
PGDM

SESSION: 2009-2011

GURU NANAK INSTITUTE OF MANAGEMENT

NEW DELHI
 CERTIFICATE

This is to certify that the project work done on “A Comparative Study of Mutual Fund
Performance” is a bonafide work carried out by Mohd Khurshed Siddiqui under my
supervision and guidance. The project report is submitted towards the fulfillment of 2-year,
full time Post Graduate Diploma in Management.
This work has not been submitted anywhere else for any other degree/diploma.

ACKNOWLEDGEMENT
I would like to take an opportunity to thank all the people who helped me in collecting

necessary information and making of the report. I am grateful to all of them for their time,

energy and wisdom.

Getting a project ready requires the work and effort of many people. I would like all those
who have contributed in completing this project. First of all, I would like to send my sincere
thanks to MR.N.P. Singh Sir for his helpful hand in the completion of my project.

Mr. N.P. Singh Dr

R.P.Singh
(Project Guide) (Director
General)
 EXECUTIVE SUMMARY

Mutual Funds are trusts that pool the savings of innumerable small investors for the purpose
of making investment in various financial instruments, capital market and money market,
with a view of providing a reasonable return.

Mutual Funds offer the advantage of convenient savings and an ideal professional
management, besides a diversified investment opportunity. Further, mutual funds offer wide
range of products to suit the requirements of a wide spectrum of investors. Important among
them include open and close ended schemes, income fund schemes, growth fund schemes,
equity fund schemes, bond fund schemes, gilt funds,index funds, etc. The operational
efficiency of a mutual fund can be judged by the NAV of the fund.

Study of mutual funds performance by private and public sector banks helps us in evaluating
the scheme performances in long run and provide us transparency to the cost structure of
different banks related to mutual funds.

Also helps us to provide recommendations and suggestions to cover the shortcomings which
we have analyzed in our project findings.

TABLE OF CONTENTS
 CHAPTER-1
INTRODUCTION
 INTRODUCTION

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of
investors to pool their money together with a predetermined investment objective. The
mutual fund will have a fund manager who is responsible for investing the gathered money
into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying
units or portions of the mutual fund and thus on investing becomes a shareholder or unit
holder of the fund.
Mutual funds are considered as one of the best available investments as compare to others
they are very cost efficient and also easy to invest in, thus by pooling money together in a
mutual fund, investors can purchase stocks or bonds with much lower trading costs than if
they tried to do it on their own. But the biggest advantage to mutual funds is diversification,
by minimizing risk & maximizing returns.

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of
investors to pool their money together with a predetermined investment objective. The
mutual fund will have a fund manager who is responsible for investing the gathered money
into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying
units or portions of the mutual fund and thus on investing becomes a shareholder or unit
holder of the fund.

Mutual funds are considered as one of the best available investments as compare to others
they are very cost efficient and also easy to invest in, thus by pooling money together in a
mutual fund, investors can purchase stocks or bonds with much lower trading costs than if
they tried to do it on their own. But the biggest advantage to mutual funds is diversification,
by minimizing risk & maximizing returns.

Mutual funds have become extremely popular over the last 20 years. What was once just
another obscure financial instrument is now a part of our daily lives. More than 80 million
people, or one half of the households in America, invest in mutual funds. That means that, in
the United States alone, trillions of dollars are invested in mutual funds.

In fact, to many people, investing means buying mutual funds. After all, it's common
knowledge that investing in mutual funds is (or at least should be) better than simply letting
your cash waste away in a savings account, but, for most people, that's where the
understanding of funds ends. It doesn't help that mutual fund salespeople speak a strange
language that is interspersed with jargon that many investors don't understand.

Originally, mutual funds were heralded as a way for the little guy to get a piece of the market.
Instead of spending all your free time buried in the financial pages of the Wall Street Journal,
all you had to do was buy a mutual fund and you'd be set on your way to financial freedom.
As you might have guessed, it's not that easy. Mutual funds are an excellent idea in theory,
but, in reality, they haven't always delivered. Not all mutual funds are created equal, and
investing in mutuals isn't as easy as throwing your money at the first salesperson who solicits
your business.

Basics of mutual funds

The article mentioned below, is for the investors who have not yet started investing in mutual
funds, but willing to explore the opportunity and also for those who want to clear their basics
for what is mutual fund and how best it can serve as an investment tool.

Getting Started
Before we move to explain what is mutual fund, it’s very important to know the area in which
mutual funds works, the basic understanding of stocks and bonds.

Stocks
Stocks represent shares of ownership in a public company. Examples of public companies
include Reliance, ONGC and Infosys. Stocks are considered to be the most common owned
investment traded on the market.

Bonds
Bonds are basically the money which you lend to the government or a company, and in return
you can receive interest on your invested amount, which is back over predetermined amounts
of time. Bonds are considered to be the most common lending investment traded on the
market.

There are many other types of investments other than stocks and bonds (including annuities,
real estate, and precious metals), but the majority of mutual funds invest in stocks and/or
bonds

Diversification
Diversification is nothing but spreading out your money across available or different types of
investments. By choosing to diversify respective investment holdings reduces risk
tremendously up to certain extent.

The most basic level of diversification is to buy multiple stocks rather than just one stock.
Mutual funds are set up to buy many stocks. Beyond that, you can diversify even more by
purchasing different kinds of stocks, then adding bonds, then international, and so on. It could
take you weeks to buy all these investments, but if you purchased a few mutual funds you
could be done in a few hours because mutual funds automatically diversify in a
predetermined category of investments (i.e. - growth companies, emerging or mid size
companies, low-grade corporate bonds, etc).

MUTUAL FUND BASICS

Working of Mutual Fund

To protect the interest of the investors, SEBI formulates policies and regulates the mutual
funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time
to time. MF either promoted by public or by private sector entities including one promoted by
foreign entities is governed by these Regulations.

SEBI approved Asset Management Company (AMC) manages the funds by making
investments in various types of securities. Custodian, registered with SEBI, holds the
securities of various schemes of the fund in its custody. According to SEBI Regulations, two
thirds of the directors of Trustee Company or board of trustees must be independent.

The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual
funds that the mutual funds function within the strict regulatory framework. Its objective is to
increase public awareness of the mutual fund industry.

AMFI also is engaged in upgrading professional standards and in promoting best industry
practices in diverse areas such as valuation, disclosure, transparency etc.

Types of Mutual Funds Schemes in India

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position,
risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a
collection of many stocks, an investors can go for picking a mutual fund might be easy. There
are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual
funds in categories, mentioned below.

Overview of existing schemes existed in mutual fund category: BY STRUCTURE

1. Open - Ended Schemes:

An open-end fund is one that is available for subscription all through the year. These do not
have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value
("NAV") related prices. The key feature of open-end schemes is liquidity.

2. Close - Ended Schemes:

These schemes have a pre-specified maturity period. One can invest directly in the scheme at
the time of the initial issue. Depending on the structure of the scheme there are two exit
options available to an investor after the initial offer period closes. Investors can transact (buy
or sell) the units of the scheme on the stock exchanges where they are listed. The market
price at the stock exchanges could vary from the net asset value (NAV) of the scheme on
account of demand and supply situation, expectations of unitholder and other market factors.
Alternatively some close-ended schemes provide an additional option of selling the units
directly to the Mutual Fund through periodic repurchase at the schemes NAV; however one
cannot buy units and can only sell units during the liquidity window. SEBI Regulations
ensure that at least one of the two exit routes is provided to the investor.

3. Interval Schemes:
Interval Schemes are that scheme, which combines the features of open-ended and close-
ended schemes. The units may be traded on the stock exchange or may be open for sale or
redemption during pre-determined intervals at NAV related prices.

The risk return trade-off indicates that if investor is willing to take higher risk then
correspondingly he can expect higher returns and vise versa if he pertains to lower risk
instruments, which would be satisfied by lower returns. For example, if an investors opt for
bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest
in capital protected funds and the profit-bonds that give out more return which is slightly
higher as compared to the bank deposits but the risk involved also increases in the same
proportion.
Thus investors choose mutual funds as their primary means of investing, as Mutual funds
provide professional management, diversification, convenience and liquidity. That doesn’t
mean mutual fund investments risk free. This is because the money that is pooled in are not
invested only in debts funds which are less riskier but are also invested in the stock markets
which involves a higher risk but can expect higher returns. Hedge fund involves a very high
risk since it is mostly traded in the derivatives market which is considered very volatile.
Advantages of Investing Mutual Funds:
1. Professional Management - The basic advantage of funds is that, they are professional
managed, by well qualified professional. Investors purchase funds because they do not have
the time or the expertise to manage their own portfolio. A mutual fund is considered to be
relatively less expensive way to make and monitor their investments.

2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or

bonds, the investors risk is spread out and minimized up to certain extent. The idea behind
diversification is to invest in a large number of assets so that a loss in any particular
investment is minimized by gains in others.

3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus
help to reducing transaction costs, and help to bring down the average cost of the unit for
their investors.

4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate
their holdings as and when they want.

5. Simplicity - Investments in mutual fund is considered to be easy, compare to other

available instruments in the market, and the minimum investment is small. Most AMC also
have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50
per month basis.

Disadvantages of Investing Mutual Funds:

1. Professional Management- Some funds doesn’t perform in neither the market, as their
management is not dynamic enough to explore the available opportunity in the market, thus
many investors debate over whether or not the so-called professionals are any better than
mutual fund or investor himself, for picking up stocks.

2. Costs – The biggest source of AMC income, is generally from the entry & exit load which
they charge from an investors, at the time of purchase. The mutual fund industries are thus
charging extra cost under layers of jargon.

3. Dilution - Because funds have small holdings across different companies, high returns
from a few investments often don't make much difference on the overall return. Dilution is
also the result of a successful fund getting too big. When money pours into funds that have
had strong success, the manager often has trouble finding a good investment for all the new
money.
4. Taxes - when making decisions about your money, fund managers don't consider your
personal tax situation. For example, when a fund manager sells a security, a capital-gain tax
is triggered, which affects how profitable the individual is from the sale. It might have been
more advantageous for the individual to defer the capital gains liability.

INDIA MUTUAL FUNDS SCHEMES

ABN AMRO Mutual Fund

Birla Sun Life Mutual Fund

BOB Mutual Fund

Canara Robero Mutual Fund

DBS Chola Mutual Fund

Deutsche Mutual Fund

DSP BlackRock Mutual Fund

Escorts Mutual Fund

Fidelity Mutual Fund

Franklin Templeton Mutual Fund

Hdfc Mutual Fund

Hsbc Mutual Fund

ING Vysya Mutual Fund

JM Financial Mutual Fund

Kotak Mahindra Mutual Fund

LIC Mutual Fund

Principal Mutual Fund

ICICI Prudential Mutual Fund

Reliance Mutual Fund

Sahara Mutual Fund

 SBI Mutual Fund

Standard Chartered Mutual Fund

Sundaram Mutual Fund

Tata Mutual Fund

Taurus Mutual Fund

UTI Mutual Fund

Fortis ( ABN ) Mutual Fund

Benchmark Mutual Fund

Bharti AXA Mutual Fund

MUTUAL FUND COMPANIES IN INDIA

Major Mutual Fund Companies in India

ABN AMRO Mutual Fund

ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India)
Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd.
was incorporated on November 4, 2003. Deutsche Bank A G is the custodian of ABN AMRO
Mutual Fund.

Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life
Financial. Sun Life Financial is a golbal organisation evolved in 1871 and is being
represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from
India. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment.
Recently it crossed AUM of Rs. 10,000 crores.

Bank of Baroda Mutual Fund (BOB Mutual Fund)

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under the
sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the AMC of
BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche Bank AG is the
custodian.

HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsorers nemely Housing
Development Finance Corporation Limited and Standard Life Investments Limited.

HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets
(India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the
Trustee Company of HSBC Mutual Fund.

ING Vysya Mutual Fund

ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee
Company. It is a joint venture of Vysya and ING. The AMC, ING Investment Management
(India) Pvt. Ltd. was incorporated on April 6, 1998.

Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the
largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup on
13th of October, 1993 with two sponsorers, Prudential Plc. and ICICI Ltd. The Trustee
Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset
Management Company Limited incorporated on 22nd of June, 1993.

Sahara Mutual Fund

Sahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial Corporation
Ltd. as the sponsor. Sahara Asset Management Company Private Limited incorporated on
August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-up capital of the AMC
stands at Rs 25.8 crore.

State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshor
fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the
largest Bank sponsored Mutual Fund in India. They have already launched 35 Schemes out of
which 15 have already yielded handsome returns to investors. State Bank of India Mutual
Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakhs
spread over 18 schemes.

Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsorers for Tata
Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment
manager is Tata Asset Management Limited and its Tata Trustee Company Pvt. Limited. Tata
Asset Management Limited's is one of the fastest in the country with more than Rs. 7,703
crores (as on April 30, 2005) of AUM.

Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is
presently having more than 1,99,818 investors in its various schemes. KMAMC started its
operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to
investors with varying risk - return profiles. It was the first company to launch dedicated gilt
scheme investing only in government securities.

Unit Trust of India Mutual Fund

UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages the
UTI Mutual Fund with the support of UTI Trustee Company Privete Limited. UTI Asset
Management Company presently manages a corpus of over Rs.20000 Crore. The sponsorers
of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of
India (SBI), and Life Insurance Corporation of India (LIC). The schemes of UTI Mutual
Fund are Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity Funds
and Balance Funds.

Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The
sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the
Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which was
changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various
schemes under which units are issued to the Public with a view to contribute to the capital
market and to provide investors the opportunities to make investments in diversified
securities.
Standard Chartered Mutual Fund
Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard
Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard
Chartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated with
SEBI on December 20,1999.

Franklin Templeton India Mutual Fund

The group, Frnaklin Templeton Investments is a California (USA) based company with a
global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial services
groups in the world. Investors can buy or sell the Mutual Fund through their financial advisor
or through mail or through their website. They have Open end Diversified Equity schemes,
Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax Saving schemes,
Open end Income and Liquid schemes, Closed end Income schemes and Open end Fund of
Funds schemes to offer.

Morgan Stanley Mutual Fund India

Morgan Stanley is a worldwide financial services company and its leading in the market in
securities, investmenty management and credit services. Morgan Stanley Investment
Management (MISM) was established in the year 1975. It provides customized asset
management services and products to governments, corporations, pension funds and non-
profit organisations. Its services are also extended to high net worth individuals and retail
investors. In India it is known as Morgan Stanley Investment Management Private Limited
(MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the first close
end diversified equity scheme serving the needs of Indian retail investors focussing on a long-
term capital appreciation.

Escorts Mutual Fund

Escorts Mutual Fund was setup on April 15, 1996 with Excorts Finance Limited as its
sponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC was
incorporated on December 1, 1995 with the name Escorts Asset Management Limited.

Alliance Capital Mutual Fund

Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital
Management Corp. of Delaware (USA) as sponsorer. The Trustee is ACAM Trust Company
Pvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd. with the
corporate office in Mumbai.

Benchmark Mutual Fund

Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd.
as the sponsorer and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company.
Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark Asset
Management Company Pvt. Ltd. is the AMC.

Canbank Mutual Fund

Canbank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as the
sponsor. Canbank Investment Management Services Ltd. incorporated on March 2, 1993 is
the AMC. The Corporate Office of the AMC is in Mumbai.

Chola Mutual Fund

Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance
Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the Trustee
Company and AMC is Cholamandalam AMC Limited.

LIC Mutual Fund

Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It
contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as
a Trust in accordance with the provisions of the Indian Trust Act, 1882. . The Company
started its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointed
Jeevan Bima Sahayog Asset Management Company Ltd as the Investment Managers for LIC
Mutual Fund.

GIC Mutual Fund

GIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), a
Government of India undertaking and the four Public Sector General Insurance Companies,
viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd. (NIA), The
Oriental Insurance Co. Ltd (OIC) and United India Insurance Co. Ltd. (UII) and is constituted
as a Trust in accordance with the provisions of the Indian Trusts Act, 1882.
 CHAPTER – 2
OBJECTIVE & METHODOLOGY
 OBJECTIVE OF THE STUDY
To study and analyze various aspects of Mutual Fund Industry in India.

⇒ To carry out a comparative study of the growth in Mutual Fund Industry in India .

⇒ To study the Government regulations in India in regard to mutual funds.

⇒ Study the Consumer Preferences Regarding Mutual Fund Scheme

⇒ What are the preferences of mutual fund?

⇒ Analysis the consumer awareness of mutual fund and the Scheme that AMC launched.

⇒ What factors affect to consumer for purchasing mutual fund Scheme.

OBJECTIVES OF MUTUAL FUND

The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry
in the year 1963. The primary objective at that time was to attract the small investors and it
was made possible through the collective efforts of the Government of India and the Reserve
Bank of India. The history of mutual fund industry in India can be better understood divided
into following phases:

MUTUAL FUND OBJECTIVES:

Mutual funds, like most firms, are required to state their objectives in their prospectuses upon
registration. We examined whether these objectives convey information about the
performance of the funds that uniquely distinguishes them from funds with other objectives.
This issue appears to be particularly critical for mutual funds, because they are able to alter
their asset portfolios more readily and with less timely public knowledge than most other
firms. In addition, most of the funds use their objective as part of their names so that
investors are made aware of the objective.

There are some plausible reasons for performance to deviate from the objectives. It is
conceivable, or even likely, thatthe fund managers cannot consistently identify securities of
firms whose performance is congruent with their objectives. Furthermore, they may not be
able to find a sufficient number of firms whose attributes fit the objective of the fund. In this
case, they may find their selection to be further limited by the regulatory restrictions on the
proportion of ownership they are allowed to hold in any single firm. The larger funds are
more likely than smaller funds to have exhausted their selection pool, so they are more likely
to deviate from their objectives as they continue to grow. This issue is also examined. The
possibility that fund managers purposefully alter their portfolios to pursue a different
objective than stated cannot be denied, but this is not testable.

This study differs from a few past studies in several ways. It uses a much larger and more
recent data base with a greater number of objective categories. The data were subjected to
more rigorous statistical tests than were used before. Two time periods were examined to see
if fund performance for objective categories changed in comparison to other categories over

time. We used the objectives stated in the prospectuses of the funds; whereas, the prior
studies used objectives based in part on judgement.

McDonald [6] examined the performance of funds, during the period from 1960 to 1969, in
light of their objectives.

He found that the objectives did explain a portion of performance as measured by excess
returns over the market return. However, he also found large overlaps in performance from
objective to objective.

Using monthly returns on 255 mutual funds for the period from January, 1973, through
December, 1977, Shawky [9] assessed four objective categories. He found that the betas of
the categories impacted on returns in a manner that he felt was representative of their
objectives. The average betas ranked in decending order “maximum growth”, “growth”,
“balanced,” and “income” objectives. The performance measures of Treynor [10], Sharpe [8],
and Jensen [2] also ranked the objectives in the same order. Martin, Keown, and Farrell [5]
concluded that fund objectives explained only about 15 percent of the total variation in
returns that was due to extra-market factors. Studies by Reints and Vandenberg [7],
Klemkosky [3], and Woerheide showed mixed results for the strength of the relationship
between performance measures and the Wiesenberger objective classifications, but in general
there appeared to be a significant relationship. Recently, the value of fund objectives to
University.

All of the studies published in professional journals used objectives given in Investment
Companies [13] published by Wiesenberger Service. The objectives provided by this source
use the same descriptive terms, such as “growth”, found inthe prospectuses of the funds, but
the actual objective applied to each fund is based on the best judgement of the managers of
the service company. Hence, all prior studies used objectives that could differ from the stated
objectives and that were subject to further change based on the changing perceptions of the
service company managers as the life of the funds was extended.
DATA AND EMPIRICAL APPROACH

The source of data for the study was the Business Week Mutual Fund Scoreboard. The
March, 1987, and the

December, 1991, issues of the data base were used for comparative purposes. Only open-end
funds were evaluated. The study was confined to seven objective categories because the other
categories listed in the data base contained an insufficient number of funds or because the
objective was too broad. Selected random comparisons of the data from March, 1987, with
data from Investment Companies showed no differences between the two sources except for
the objective categories, which was discussed above. Two different statistical tests, regression
analysis and Tukey-Kramer mean comparison tests [11,4], were used to assess the impact of
fund objectives on the performance measures. Regardless of the test instrument or
performance measure used, the null hypothesis tested was that in every case there was a
significant difference between the fund categories in terms of the performance measure in
use. The alternative hypothesis was that some of the categories were not significantly
different. In the regressions, the expectation was that all coefficients of the variables except
size should have positive signs. No a priori conclusion about the sign of the coefficient of the
size variable was made. Similar hypotheses were tested onsub-samples of the fund categories,
where the categories were divided into a large and a small group around the median asset
size. Two measures of performance, the Treynor Index and the three-month holding period
returns, were used, and beta was also included separately as a measure of the risk of the
funds. The Treynor Index was computed from the three-month holding period returns, betas,
and the market return on T-Bills at the end of the holding period. Shawky’s study showed
that the Treynor , Sharpe and Jensen measures ranked the funds equivalently. The Treynor
measure was chosen because the data base was more easily applied to this measure.

Mutual Fund Objectives: Do They Provide A Useful Guide For Investors?

This variant of the model is predicated on the risk-free and market rates of return having the
same values for every fund in the sample because the regressions are cross-sectional. Hence,
these return measures will become components of the constant term. If beta and the
objectives of the funds are not perfectly congruent, any effects of the objectives of the funds
would be captured in the error term. Consequently, variables reflecting the fund objectives
must be added to the estimating equation to test any impacts from the objectives. In the case
of regressions run on the Treynor Index as Ri, beta was excluded as an independent variable.

The Tukey-Kramer tests were used to determine whether there were significant differences
between fund categories based on the means of the performance measures and betas. This test
performs multiple pair-wise mean comparisons to group the funds. Overlaps in these
groupings imply that certain objective categories are not distinguishable from one another.

Regression Analyses

The results of regressions on the three-month holding period returns of the funds for both the
1987 and 1991 data sets are shown in Table 1. The results include the aggregate data set and
the sub-samples divided around the median asset size into a large and a small group. As was
expected, beta was significant for all sample groups in both time periods. With the aggregate
samples for the two time periods, asset size was negative but insignificant. Only the small
company and international funds were significantly different (at the 0.1 level) than income
funds in both time periods, but in the case of the international funds the sign of the coefficient
was positive in 1987 and negative in 1991. This sign change may reflect

a major change in currency exchange rates between the two periods. The maximum growth
and growth funds were significant in 1987, but insignificant in 1991. The balanced funds
were significant in 1991 with a positive coefficient. With the large and small asset-size sub-
samples, size was insignificant except in the case of the small asset-size group in 1991. Not
only was this variable significant at that time, but also the sign of the coefficient became
positive. Except for the international funds, no one objective variable was consistently
significant in both size groups and both time periods. Inconsistency was also found with the
signs of the coefficients. By the nature of this test instrument, the objective variables can fall
into only two categories (i.e. those that were significantly different from the income funds
and those that were not significantly different). Nevertheless, shifts in significance occurred
with time period and asset size grouping. Consequently, the null hypothesis cannot be
accepted for both the aggregate sample and the asset-size sub-samples.

The regression results with the Treynor Index are shown in With the aggregate sample, only
the growth and income category changed significance between the time periods. The
international funds were significant, but they showed a reversal in the signs of their
coefficients between the two time periods. With the 1987 data, the objectives showing
significance were the same in both the large and small asset-size groups. Size was significant
for the small asset grouping but not for the large grouping. Size was also significant for the
small asset sub-sample in 1991, but the sign of the coefficient was reversed as compared to
1987. Another difference between the large and small asset sub-samples was that in 1991
maximum growth funds were significant in the large asset group and not in the small. This is
a particularly notable finding because it indicates that in the case of smaller funds in 1991,
fund objectives (maximum growth and income) that would be expected to be at opposite ends
of the performance spectrum were not significantly different. The results with the Treynor
Index showed more consistency between time periods and asset size groupings than was the
case with three-month returns. Hence, the results with this measure prevent acceptance of the
null hypotheses.

Tukey-Kramer tests to group the fund objectives by pair-wise comparisons of the means of
the two performance measures, and of beta, are shown in Table 3. The level of significance of
the tests was 0.05. The groups are alphabetized in order of decending mean size, so the group
with the highest mean is group A. The most complex grouping results were obtained on the
Treynor performance measure in 1987, so this set was chosen to illustrate the interpretation.
The international, maximum growth, and small company categories are not distinguishable
from one another.

Likewise, the maximum growth, small company, and growth categories are also
indistinguishable. Small company, growth, and growth and income categories are
indistinguishable, as are growth and income and income funds. Finally, income funds are
indistinguishable from balanced funds. The international, maximum growth, and small
company funds are significantly different than the growth and income, income, and balanced
funds. Further interpretations can be made, but the point is evident that clear distinctions in
performance based on fund objectives are very limited with this performance measure. The
groupings based on beta seem to be the most distinctive within and between time periods.
Even in this case, however, there are some important differences such as the international
grouping being the same as the balanced group in 1987, but significantly different in 1991.
The three-month return groupings fall between the other two measures in terms of overlaps of
groups and consistency of ranking. At this juncture, the null hypothesis cannot be accepted
with this test either.

The sub-samples based on asset size were also analyzed using the Tukey test, and both sub-
samples were in the same group. In both time periods and with both performance measures
and betas the means of the asset-size groups were not significantly different. Hence, in this
comparison, the null hypothesis concerning asset size cannot be accepted. Our results show
that the stated objectives of mutual funds do not necessarily distinguish the performance of
the funds. Therefore, an investor using stated objectives may err in his selection decisions.
Based on these results, even if he/she makes an initial decision that is congruent with his/her
goals, the evidence shows that the performance of the fund may change over time. As a
result, the performance of the fund may deviate from the original assessment to the point that
it appears to perform like funds in other objective categories. This conclusion seems to be
valid for both performance measures and for beta. The asset size of the funds does not seem
to be a major factor in explaining the lack of consistency between performance and
objectives. Further research is needed to determine whether investors are influenced by fund
objectives to the extent that they are making selection decisions that are inappropriate for
their investment goals.

SHARPE’S PERFORMANCE INDEX

Sharpe’s performance index gives a single value to be used for the performance ranking of
various funds or portfolios. Sharpe index measures the risk premium of the portfolio relative
to the total amount of the risk in the portfolio. The risk premium is the difference between the
portfolio’s average rate of return and the riskless rate of return. The standard
deviation of the portfolio indicates the risk. The index assigns the highest values to assets that
best risk-adjusted average rate of return

(Rp – Rf)
St = ∂p
 Sharpe Index =(Portfolio average return – Risk free rate of return)/Standard deviation
of the portfolio return

TREYNOR’S PERFORMANCE INDEX

To understand the Treynor index, an investor should know the concept of characteristic line.
The relationship between the given market return and the fund’s return is given by the
characteristic line. The fund’s performance is measured in relation to the market
performance. The ideal fund’s return rises at a faster rate than the general market
performance when the market moving upwards and its rate of return declines slowly than the
market return, in the decline.

With the help of the characteristic line Treynor measures the performance of the funds. The
slope of the line is estimated by

Rp = α + β Rm + ep

Rp = Portfolio return
Rm= The market return or index return

ep = The error term or the residual

α, β= Co-efficient to be estimated

JENSEN’S PERFORMANCE INDEX

The absolute risk adjusted return measure was developed by Micheal Jenson and commonly
known as Jensen’s measure. It is mentioned as the measure of absolute performance because
a definite standard is set and against that the performance is measured.
Rp = α + β (Rm – Rf)
Rp = average return of portfolio
Rf = riskless rate of interest
α = the intercept
β = a measure of systematic risk
Rm = average market return
 C) RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the research problem is to how
research is done scientifically. It consists of the different steps that are generally adopted by
the researcher to the study his research problem along with logic behind them. It is necessary
to the researcher to develop certain tests.
The research will be both qualitative and quantitative in its nature. The qualitative approach
will apply to both, descriptive and inductive forms of research. While as in case of
quantitative approach, an extensive use will be made of the literature available to carry out a
detail research on the nature of the problem.

RESEARCH DESIGN:
Research design is a plan to answer whom, when, where, and how the subject under
investigation conceived so as to obtain answers to research questions. The type of research
design involved in this study is descriptive research studies.

DATA SOURCE
The research will make use of the secondary sources of data in eliciting information.

Secondary Data

⇒ The secondary source of data will include relevant literature including periodicals and
journal articles in the areas of Mutual Funds Industry in India. The books and journals
will provide esoteric and quantitative data. Other sources will include case studies written
by various academic scholars in the field of Mutual Funds Industry in India.

Questionnaire Design
A well structured questionnaire was used for this study. The types of questions used in the
questionnaire were open-ended, multiple-choice .
SATISTICAL TOOLS: The collected data has been subjected to analyses by unit’s
appropriate tools, percentage, standard deviation, regression analysis etc.
The information gathered analyzed by using the following appropriate tool such as:
• Percentage Analysis
• Standard deviation
• Regression analysis
 CHAPTER-3

LITERATURE REVIEW
 LITERATURE REVIEW

MUTUAL FUNDS IN INDIA

Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down
and are generally below the inflation rate. Therefore, keeping large amounts of money in
bank is not a wise option, as in real terms the value of money decreases over a period of time.

One of the options is to invest the money in stock market. But a common investor is not
informed and competent enough to understand the intricacies of stock market. This is where
mutual funds come to the rescue.

A mutual fund is a group of investors operating through a fund manager to purchase a diverse
portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easy to invest in.
By pooling money together in a mutual fund, investors can purchase stocks or bonds with
much lower trading costs than if they tried to do it on their own. Also, one doesn't have to
figure out which stocks or bonds to buy. But the biggest advantage of mutual funds is
diversification.

Diversification means spreading out money across many different types of investments.
When one investment is down another might be up. Diversification of investment holdings
reduces the risk tremendously.

On the basis of their structure and objective, mutual funds can be classified into following
major types:

Closed-end funds: A closed-end mutual fund has a set number of shares issued to the public
through an initial public offering.

Open-end funds: Open end funds are operated by a mutual fund house which raises money
from shareholders and invests in a group of assets

Large cap funds: Large cap funds are those mutual funds, which seek capital appreciation
by investing primarily in stocks of large blue chip companies
Mid-cap funds: Mid cap funds are those mutual funds, which invest in small / medium sized
companies. As there is no standard definition classifying companies

Equity funds: Equity mutual funds are also known as stock mutual funds. Equity mutual
funds invest pooled amounts of money in the stocks of public companies.

Balanced funds: Balanced fund is also known as hybrid fund. It is a type of mutual fund that
buys a combination of common stock, preferred stock, bonds, and short-term bonds

Growth funds: Growth funds are those mutual funds that aim to achieve capital appreciation
by investing in growth stocks.

No load funds: Mutual funds can be classified into two types - Load mutual funds and No-
Load mutual funds.

Exchange traded funds: Exchange Traded Funds (ETFs) represent a basket of securities that
is traded on an exchange, similar to a stock. Hence, unlike conventional mutual funds

Value funds: Value funds are those mutual funds that tend to focus on safety rather than
growth, and often choose investments providing dividends as well as capital appreciation.

Money market funds: A money market fund is a mutual fund that invests solely in money
market instruments. Money market instruments are forms of debt that mature in less than one
year and are very liquid.

International mutual funds: International mutual funds are those funds that invest in non-
domestic securities markets throughout the world.

Regional mutual funds: Regional mutual fund is a mutual fund that confines itself to
investments in securities from a specified geographical area, usually, the fund's local region.

Sector funds: Sector mutual funds are those mutual funds that restrict their investments to a
particular segment or sector of the economy.
Index funds: An index fund is a a mutual fund or exchange-traded fund) that aims to
replicate the movements of an index of a specific financial market.

Fund of funds: A fund of funds (FOF) is an investment fund that holds a portfolio of other
investment funds rather than investing directly in shares, bonds or other securities.

PERFORMANCE OF MUTUAL FUND IN INDIA

The performance of mutual funds in India from the day the concept of mutual fund took birth
in India. The year was 1963. Unit Trust of India invited investors or rather to those who
believed in savings, to park their money in UTI Mutual Fund.

For 30 years it goaled without a single second player. Though the 1988 year saw some new
mutual fund companies, but UTI remained in a monopoly position. The performance of
mutual funds in India in the initial phase was not even closer to satisfactory level. People
rarely understood, and of course investing was out of question. But yes, some 24 million
shareholders was accustomed with guaranteed high returns by the begining of liberalization
of the industry in 1992. This good record of UTI became marketing tool for new entrants.
The expectations of investors touched the sky in profitability factor. However, people were
miles away from the praparedness of risks factor after the liberalization.

The Assets Under Management of UTI was Rs. 67bn. by the end of 1987. Let me concentrate
about the performance of mutual funds in India through figures. From Rs. 67bn. the Assets
Under Management rose to Rs. 470 bn. in March 1993 and the figure had a three times higher
performance by April 2004. It rose as high as Rs. 1,540bn.

The net asset value (NAV) of mutual funds in India declined when stock prices started falling
in the year 1992. Those days, the market regulations did not allow portfolio shifts into
alternative investments. There were rather no choice apart from holding the cash or to further
continue investing in shares. One more thing to be noted, since only closed-end funds were
floated in the market, the investors disinvested by selling at a loss in the secondary market.
The performance of mutual funds in India suffered qualitatively. The 1992 stock market
scandal, the losses by disinvestments and of course the lack of transparent rules in the
whereabout rocked confidence among the investors. Partly owing to a relatively weak stock
market performance, mutual funds have not yet recovered, with funds trading at an average
discount of 1020 percent of their net asset value.
The supervisory authority adopted a set of measures to create a transparent and competitve
environment in mutual funds. Some of them were like relaxing investment restrictions into

the market, introduction of open-ended funds, and paving the gateway for mutual funds to
launch pension schemes.

The measure was taken to make mutual funds the key instrument for long-term saving. The
more the variety offered, the quantitative will be investors.

At last to mention, as long as mutual fund companies are performing with lower risks and
higher profitability within a short span of time, more and more people will be inclined to
invest until and unless they are fully educated with the dos and donts of mutual funds.

MUTUAL FUNDS ADVANTAGES:

The benefits on offer are many with good post-tax returns and reasonable safety being the
hallmark that we normally associate with them. Some of the other major benefits of investing
in them are:

Number of available options

Mutual funds invest according to the underlying investment objective as specified at the time
of launching a scheme. So, we have equity funds, debt funds, gilt funds and many others that
cater to the different needs of the investor. The availability of these options makes them a
good option. While equity funds can be as risky as the stock markets themselves, debt funds
offer the kind of security that aimed at the time of making investments. Money market funds
offer the liquidity that desired by big investors who wish to park surplus funds for very short-
term periods. The only pertinent factor here is that the fund has to selected keeping the risk
profile of the investor in mind because the products listed above have different risks
associated with them. So, while equity funds are a good bet for a long term, they may not find
favor with corporate or High Net worth Individuals (HNIs) who have short-term needs.

Diversification
Investments spread across a wide cross-section of industries and sectors and so the risk is
reduced. Diversification reduces the risk because not all stocks move in the same direction at
the same time. One can achieve this diversification through a Mutual Fund with far less
money than one can on his own.

Professional Management
Mutual Funds employ the services of skilled professionals who have years of experience to
back them up. They use intensive research techniques to analyze each investment option for
the potential of returns along with their risk levels to come up with the figures for
performance that determine the suitability of any potential investment.

Potential of Returns
Returns in the mutual funds are generally better than any other option in any other avenue
over a reasonable period. People can pick their investment horizon and stay put in the chosen
fund for the duration. Equity funds can outperform most other investments over long periods
by placing long-term calls on fundamentally good stocks. The debt funds too will outperform
other options such as banks. Though they are affected by the interest rate risk in general, the
returns generated are more as they pick securities with different duration that have different
yields and so are able to increase the overall returns from the

Get Focused
I will admit that investing in individual stocks can be fun because each company has a unique
story. However, it is important for people to focus on making money. Investing is not a game.
Your financial future depends on where you put you hard-earned dollars and it should not
take lightly.

Efficiency
By pooling investors' monies together, mutual fund companies can take advantage of
economies of scale. With large sums of money to invest, they often trade commission-free
and have personal contacts at the brokerage firms.

Ease of Use
Can you imagine keeping track of a portfolio consisting of hundreds of stocks? The
bookkeeping duties involved with stocks are much more complicated than owning a mutual
fund. If you are doing your own taxes, or are short on time, this can be a big deal.

Wealthy stock investors get special treatment from brokers and wealthy bank account holders
get special treatment from the banks, but mutual funds are non-discriminatory. It doesn't
matter whether you have $50 or $500,000, you are getting the exact same manager, the same
account access and the same investment.

Risk
In general, mutual funds carry much lower risk than stocks. This is primarily due to
diversification (as mentioned above). Certain mutual funds can be riskier than individual
stocks, but you have to go out of your way to find them.

With stocks, one worry is that the company you are investing in goes bankrupt. With mutual
funds, that chance is next to nil. Since mutual funds, typically hold anywhere from 25-5000
companies, all of the companies that it holds would have to go bankrupt.

I will not argue that you should not ever invest in individual stocks, but I do hope you see the
advantages of using mutual funds and make the right choice for the money that you really
care about.

Drawbacks of Mutual Funds

Mutual funds have their drawbacks and may not be for everyone:

No Guarantees: No investment is risk free. If the entire stock market declines in value, the
value of mutual fund shares will go down as well, no matter how balanced the portfolio.
Investors encounter fewer risks when they invest in mutual funds than when they buy and sell
stocks on their own. However, anyone who invests through a mutual fund runs the risk of
losing money.

Fees and commissions: All funds charge administrative fees to cover their day-to-day
expenses. Some funds also charge sales commissions or "loads" to compensate brokers,
financial consultants, or financial planners. Even if you don't use a broker or other financial
adviser, you will pay a sales commission if you buy shares in a Load Fund.

Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to
70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you
will pay taxes on the income you receive, even if you reinvest the money you made.

Management risk: When you invest in a mutual fund, you depend on the fund's manager to
make the right decisions regarding the fund's portfolio. If the manager does not perform as
well as you had hoped, you might not make as much money on your investment as you
expected. Of course, if you invest in Index Funds, you forego management risk, because
these funds do not employ managers

Regulatory Aspects/Schemes of a Mutual Fund

The asset management company shall launch no scheme unless the trustees approve such
scheme and a copy of the offer document has filed with the Board.

Every mutual fund shall along with the offer document of each scheme pay filing fees.

The offer document shall contain disclosures, which are adequate in order to enable the
investors to make informed investment decision including the disclosure on maximum
investments proposed to make by the scheme in the listed securities of the group companies
of the sponsor a close-ended scheme shall fully redeemed at the end of the maturity period.
"Unless a majority of the unit holders otherwise decide for its rollover by passing a
resolution".

The mutual fund and asset management company shall be liable to refund the application
money to the applicants,-

(i) If the mutual fund fails to receive the minimum subscription amount referred to in clause
(a) of sub-regulation (1);

(ii) If the moneys received from the applicants for units are in excess of subscription as
referred to in clause (b) of sub-regulation (1).

Rules Regarding Advertisement:

The offer document and advertisement materials shall not be misleading or contain any
statement or opinion, which are incorrect or false.

General Obligations:
The financial year for all the schemes shall end as of March 31 of each year. Every mutual
fund or the asset management company shall prepare in respect of each financial year an
annual report and annual statement of accounts of the schemes and the fund as specified in
Eleventh Schedule.

Every mutual fund shall have the annual statement of accounts audited by an auditor who is
not in any way associated with the auditor of the asset management company.
 CHPTER-4

HISTORY OF MUTUAL FUND IN

INDIA